Kalshi has sued Arizona in federal court in order to prevent the state from taking enforcement action against the prediction market. But unlike other state lawsuits, the definition of gambling under Arizona state law — which includes a carve-out for “business transactions that are valid under the law of contracts” — might help Kalshi’s case.
Kalshi filed the lawsuit in the U.S. District Court for the District of Arizona Thursday, and it was published on the court docket Friday. The prediction market is asking the court for an injunction that would prevent authorities in Arizona from taking action against the business.
Kalshi-AZ-lawsuit-2026The lawsuit comes almost 10 months after Arizona’s Department of Gaming sent Kalshi a cease-and-desist letter, which said “Kalshi is not licensed and its operation of event wagering in Arizona is illegal.”
According to the complaint, the prediction market now “believes the State of Arizona will imminently bring an enforcement action against Kalshi with the intent to prevent Kalshi from offering event contracts for trading on its federally regulated exchange.”
The complaint says that on March 11, “Kalshi’s counsel attempted to contact representatives of Defendants to obtain written assurances of non-enforcement. Defendants’ representatives did not respond.” That pattern of activity is similar to events in Iowa, which Kalshi sued Wednesday.
Kalshi argues for preemption
Much of the complaint repeats arguments that Kalshi has made in other lawsuits. Specifically, it argues that Kalshi can be regulated only by the federal Commodity Futures Trading Commission (CFTC), as it says state laws are preempted by the Commodity Exchange Act (CEA). States generally argue both that Kalshi’s sports contracts do not meet the definitions provided in the CEA, and that any preemption of state law was only intended to overrule state laws about commodity regulation, not gambling laws.
Past district courts that have considered Kalshi’s cases are divided on these arguments, not just disagreeing on whether to let Kalshi keep offering sports contracts, but offering different interpretations of almost all of the legal questions at the heart of the cases.
So far, Kalshi continues to offer sports contracts in all 50 states. While some courts, such as in Maryland and Ohio, have ruled that Kalshi’s sports contracts are subject to state gambling law, Kalshi has appealed those decisions.
Arizona ‘business transactions’ carve-out
There is one element, however, that makes this lawsuit notably different from other cases between Kalshi and states: Arizona’s gambling laws include a carve-out that may well cover Kalshi.
Kalshi pointed to this carve-out in its complaint, in order to argue that the department’s actions “contravene Arizona’s own anti-gambling laws.”
Arizona’s definition of gambling in state law says that “‘Gambling’, ‘gamble’ or ‘wager’ means one act of risking or giving something of value for the opportunity to obtain a benefit from a game or contest of chance or skill or a future contingent event but does not include bona fide business transactions that are valid under the law of contracts including contracts for the purchase or sale at a future date of securities or commodities, contracts of indemnity or guarantee, life, health or accident insurance and fantasy sports contests.”
That carve-out could help Kalshi’s case, but there may still be arguments over whether its sports contracts qualify as “valid under the law of contracts.” Some courts, such as the District Court for the District of Nevada, have determined that sports event contracts do not meet the definition of a “swap” — the legal category that event contracts are classed under — provided in the CEA.
According to the CEA, a swap includes “any agreement, contract, or transaction … that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” Nevada District Court Judge Andrew Gordon said that contracts on the winner of a sporting event were dependent on the outcome of an event rather than its occurrence.
Kalshi had previously attempted to argue it didn’t meet the state definition of gambling in Nevada, during a case to determine whether its case against the Nevada Gaming Control Board (NGCB) should be heard in state or federal court. However, in that case the potential carve-out appears to be much more ambiguous. Nevada’s gaming laws say “except as otherwise provided by law, it is unlawful” to accept wagers “without having first procured, and thereafter maintaining in effect, all federal, state, county, and municipal gaming licenses as required by statute [or] regulation.”
Arizona overreaching?
Kalshi also claimed that Arizona’s attempt to prevent any licensees that partner with exchanges that offer prediction markets in Arizona — even if the partnership does not cover Arizona — from operating in the state, was beyond the state’s powers. In December, the ADG revoked the fantasy sports license of Underdog, which is partnered with Crypto.com to offer event contracts in 32 states but does not offer them in Arizona.
“The upshot of this threat is that any Arizona licensee that partners with Kalshi not just in Arizona, but in any other state around the country, is at risk of losing their license. This includes Arizona licensees who partner with Kalshi to offer sports contracts in New Jersey and Tennessee, where federal courts have enjoined state attempts to prohibit Kalshi’s sports event contract offerings, as well as in the many states in which no such enforcement has even been attempted,” the complaint said. “The ADG’s message to its gaming licensees has been clear: Kalshi’s business is operating in violation of the law and if you do business with Kalshi anywhere in the country, your license is in jeopardy.”
Kalshi seeks emergency stay in Nevada
Kalshi is also attempting to fight enforcement in neighboring Nevada, where the NGCB sued the business in state court. Earlier this month, the state’s district court determined that the case should be held in state court, which could potentially issue an order banning Kalshi’s sports contracts without the exchange getting a chance to make its arguments against a ban first. The state court in Nevada already banned Polymarket’s sports contracts.
On Friday, Kalshi filed an emergency motion with the Ninth Circuit for a stay pending appeal of the decision to send the case back to state court.
Usually, the decision to send a case back down to state court cannot be appealed, but there is an exception for parties that argue they were acting as a federal officer. Unlike Polymarket, Kalshi didn’t use this argument directly, but instead argued that the NGCB should have sued the CFTC, which itself is a federal officer, alongside Kalshi. The district court determined that the NGCB was allowed to sue Kalshi alone.
